What S&P Downgrade? Brazil Rallies On Political Change?

By Shuli Ren

What S&P downgrade? Brazil has so far shrugged it off. The iShares MSCI Brazil Capped ETF (EWZ) has rallied 4% since. This morning, the ETF is up 3.2%. The Bovespa Index advanced 2.3%.

The rally today may be driven by a new poll that shows President Dilma Rousseff‘s approval rating fell for the first time since street protests last July. Brazil is set for a general election in October. A new government may usher in reforms to improve the worsening economy. Analysts expect Brazil’s GDP to grow by only 1.7% this year, down from 2.3% last year, while inflation accelerates to 6.3% from last year’s 5.9%, according to Bloomberg.

Brazil had a mini-rally last week. The iShares Brazil ETF gained 6.5% then. In an email response yesterday, Sophie Bosch de Hood, Co-Portfolio Manager for the JPMorgan Latin America Fund explained why and what that means:

Brazil had a mini rally last week basically because of the rumors of a recent poll that showed Dilma sliding in her approval.

The moves in Brazil show how the country is quite volatile right now. Valuation in Brazil looks reasonable but there is a lot of uncertainty (elections/rationing/inflation/rating agency downgrade) and pessimism but any potential upside surprise leads to a rally. The region as a whole is a stock pickers market. There is so much uncertainty in the region with a lot of election or political clout that the market is not discriminating between good and bad companies so good opportunities will arise to buy good companies at great prices. The risk reward balance is tilting and investors should be asking themselves when do I buy not whether they should sell now.

Earlier this week, Citi Research speculated on the same cause, saying:

The outsized movers of the past few days in Brazil have been the listed companies owned by the federal government itself: Petrobras (PBR), Eletrobras (EBR), and Banco do Brasil (BDORY).

We are seeing it again. This morning, Petrobras rallied 5.8%, Electrobras advanced 7.5%, and Banco do Brasil (BBAS3.Brazil) gained 5.1%.

Two of the other Fragile Five -India and Indonesia – will also have general elections this year, in May and July. Incumbents are expected to leave and both equity markets have rallied. Can Brazil be next?

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There are 5 comments

MARCH 28, 2014 1:55 A.M.

Cristiano Ferreira Meyer wrote:

Brazil was never actually Latin America. It is the Afro-Portuguese America. It always had another economics profile and scale as well as other socio-cultural profile. The Brazilian economy, for better or for worse, has always been distinct from its Latino (= Hispanic) neighbors.

MARCH 28, 2014 10:47 A.M.

John wrote:

You have to live here to realize what a mess it is here.There is a high degree of corruption at every level of government.You have a country that may have 2% growth has over ¨6% inflation probably much higher and interest rates at 10 and a half %,some of the highest taxes in the world.There is great unrest in the country.This is a formula for a disasterYou have very poor interstructure,poor health care,and poor schools but we do have the world cup.that has made a few brasilians very rich and that the average brasilian will be paying for god only knows how many years.

MARCH 28, 2014 1:23 P.M.

Elaine wrote:

I totally agree with John, there is a high degree of corruption at every level of government. the inflation is higher and the taxes are the highest in the world. We have poor schools and health care.

MARCH 28, 2014 4:00 P.M.

Jeffrey Himes wrote:

@ Cristiano F Meyer:
You are right: Brazil's economy is not like its neighbours', it's a lot worse. Chile had 2.9% inflation last year. Brazil's inflation is only second to Venezuela, the most fragile and undemocratic country in S America. Petrobras alone lost about R$ 31 billion (roughly US$ 14.7 billion) last year, due to the government's artificial grip on the inflation. It would have topped 7.6% otherwise. Fake numbers, false democracy, and creative accounting may fool some Brazilians, but not all.

MARCH 28, 2014 5:18 P.M.

Adriano wrote:

Brazil has failed in built a strong democracy and its future looks dark, pretty much like others countries where a political party stay in power too much time
The pressure peer from Cuba and Venezuela haunts Brazil weeks democracy, the ruling party like its peers now thinks that stay in power forever is OK, as long as people vote for you, never mind you are just buying theirs votes using public money.

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Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.